Why Haven’t Loan Officers Been Told These Facts?
MLOs must remember that while the housing GSEs will likely align on most matters, there are nuanced differences in credit policies and practices.
Ensure that you and your lender do not conflate or confuse GSE policy.
Appraisal FAQs from the GSEs
FHLMC Question One: Can appraisers use comparable sales older than 12 months?
FHLMC Answer One: Yes. Appraisers may use comparable sales that sold and settled more than 12 months prior to the date of the appraisal. In some markets, particularly rural markets, there is often much less sales activity than in more populated locations. Appraisers must justify and support their decision to use aged comparable sales and include market supported adjustments as warranted. The Uniform Standards of Professional Appraisal Practice (USPAP) requires an appraiser to provide credible assignment results that are not misleading.
FHLMC Question Two: Does Freddie Mac purchase mortgages secured by unique properties?
FHLMC Answer Two: Yes. Freddie Mac purchases mortgages secured by properties that are unique or may not conform to neighborhood residential characteristics in terms of type, design, age or the materials and techniques used in construction.
FHLMC Question Three: Freddie Mac identifies the use of unsupported or subjective terms or statements to assess or rate as unacceptable appraisal practices. The appraisal forms require the appraiser to identify the growth of the neighborhood as “rapid”, “stable”, or “slow.” How should an appraiser comply with Freddie Mac’s requirements?
FHLMC Answer Three: Freddie Mac’s policy permits the use of such terms if the appraiser provides a foundation for analysis and contextual information. The appraiser must provide the foundation or contextual information for their conclusion related to the identification of the growth of the neighborhood as “rapid”, “stable”, or “slow” in the appraisal report.
FHLMC Question Four: What is a virtual inspection of a property performed by an appraiser?
FHLMC Answer Four: A virtual inspection is an inspection of the subject property where the appraiser is located remotely off-site and with the assistance of an individual on-site, views the property via livestream using technology to capture the photographs required to verify completion.
FNMA Question One: Why are boarding houses and bed and breakfast properties considered to be an ineligible property type?
FNMA Answer One: Fannie Mae purchases and securitizes mortgage loans secured only by properties that are primarily residential in nature. Boarding houses and bed and breakfast properties are not primarily residential in nature and therefore are not eligible.
FNMA Question Two: Why does Fannie Mae require the lender to provide the sales contract to the appraiser?
FNMA Answer Two: Fannie Mae’s policy is intended to help ensure that the appraiser is aware of all relevant aspects of the transaction. The sales contract provides important sales and financing data, including whether there are any concessions as part of the transaction.
FNMA Question Three: Will Fannie Mae purchase loans with outstanding repair or completion escrows on an existing property?
FNMA Answer Three: Yes, as long as the items for which the escrows were established are reflected in the appraiser’s opinion of value and the lender can ensure that they do not affect the safety, soundness, or structural integrity of the property.
FNMA Question Four: Is there a required number of comparable sales that the appraiser must provide when appraising a one-unit property with an accessory dwelling unit (ADU)?
FNMA Answer Four: When there is an ADU, the appraisal report must include a description of the ADU and analysis of any effect it has on the value or marketability of the subject property. The appraisal report must demonstrate that the improvements are acceptable for the market. An aged settled sale will qualify as a comparable sale, and an active listing or under contract sale will qualify as a supplemental exhibit to show marketability.
If it is determined that the property contains an ADU that is not allowed under zoning (where an ADU is not allowed under any circumstance), the appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least two comparable sales with the same non-compliant zoning use. Aged settled sale(s) with the same non-compliant zoning use are acceptable if recent sales are not available. At a minimum, the appraisal report must include a total of three settled sales.
BEHIND THE SCENES – Title Companies Allegedly Recruited Real Estate Agents, Offered Illegal Payouts in Exchange for Client Referrals
Stakeholders often associate compliance and enforcement action with federal and state regulators. However, in most states, the State Attorney General sits at the top of the local law enforcement heap and may selectively assert jurisdiction for prosecution. When in the state’s interest or when vindicating jurisdictional lines, the Attorney General has the authority to pursue civil and criminal cases.
Moreover, states sometimes bring complaints against covered persons using local statutes instead of federal codes. This may be of tactical importance to a successful prosecution. Some federal laws require prosecution in federal court. Other times, the state may bring a violation of federal law against a person in state court. In this case study, the Attorney General for the District of Columbia (OAG) chose to prosecute the complaint in local courts using local code.
When facing a local Attorney General’s prosecution, a covered person may be disadvantaged on several fronts, including the difficulty of mounting a defense against a law the person and their counsel have little or no experience with. Furthermore, stakeholders sometimes complain that local courts are implicitly biased against certain types of persons.
The District of Columbia Code
The District of Columbia law provides that “[a] title insurer or other person shall not give or receive, directly or indirectly, any consideration for the referral of title insurance business or escrow or other service provided by a title insurer.” D.C. Code § 31-5031.15.
The DC OAG alleges that Allied, Agent JVs, and Agent Members violated District law by providing consideration to Agent Members for the referral of title insurance and escrow business to Allied and the Agent JVs. OAG alleges that Allied and Agent JVs have given, and Agent Members have accepted, multiple forms of direct and indirect consideration in exchange for referrals—including but not limited to providing Agent Members the exclusive opportunity to purchase a discounted ownership interest in Agent JVs, distributing profits from Agent JVs to Agents Members, and organizing and hosting multiple yacht parties, all in violation of D.C. Code § 31-5031.15.
The Respondents Choose to Settle
“Respondents and Guarantors deny all of the District’s allegations and claims, including that they hosted “yacht parties” that violated D.C. Code § 31-5031.15 and/or that they violated any consumer protection laws, including the CPPA or D.C. Code § 31-5031.15.”
Many States Have a Local Version of the Consumer Financial Protection Act of 2010
The respondent filing refers to the District of Columbia’s general consumer protection law, the Consumer Protection Procedures Act (CPPA), which prohibits various deceptive and unconscionable business practices. It is codified in DC Official Code §§ 28-3901 to 28-3913. The Consumer Financial Protection Act of 2010, or Title X of Dodd-Frank, is a federal statute covering violations of federal consumer protection law and unfair, deceptive, or abusive acts or practices in financial services.
Like the District of Columbia, many states have created their own version of the CFPA. States sometimes duplicate federal law because they believe federal agencies are too prone to political winds that may erode necessary consumer protections. Consequently, to keep their options open, state lawmakers create local codes allowing local law enforcement to prosecute cases as state law violations in state court instead of engaging with federal stakeholders.
From the DC OAG
The District of Columbia Attorney General Gains Settlement
August 29, 2024
Attorney General Brian L. Schwalb today announced that Allied Title & Escrow, LLC (Allied), KVS Title, LLC (KVS), Modern Settlements, LLC (Modern), and Union Settlements, LLC (Union) will pay a combined $3,290,000 after an investigation by the Office of the Attorney General (OAG) revealed the widespread use of illegal kickback schemes in the title insurance market. As part of the scheme, title companies offered real estate agents discounted ownership interests and lucrative profit sharing in exchange for business referrals that boosted the companies’ revenues. These conflict of interest-plagued, anticompetitive arrangements limited District homebuyers’ ability to shop for the best price and service when purchasing title insurance and escrow services and hurt law-abiding competitors in the title insurance industry, in violation of the District’s Consumer Protection Procedures Act (CPPA).
“District residents are entitled to make fully informed decisions about how to spend their hard-earned money, especially when it comes to making the high stakes purchase of a home,” said Attorney General Schwalb. “These four companies violated the most fundamental principles of a free and fair marketplace: they exploited consumers, limited their choices, and hurt other businesses that play by the rules. Today, we’re exposing and putting an end to these elaborate and illegal kickback schemes.”
Required by most lenders for home loans, title insurance protects a lender and a homebuyer from defects in a title to property, such as a previous owner’s debts. Real estate agents commonly suggest title insurance companies to their clients. However, both federal and District law prohibit kickbacks and other forms of compensation for the referral of title insurance and escrow business. These laws ensure that real estate agents act in the best interests of their clients—rather than themselves—and help prevent closing costs and fees from becoming artificially inflated by anticompetitive practices. While federal law allows for certain affiliated business arrangements that meet specific requirements, District law is more stringent and does not have such an exception.
OAG’s investigations found that Allied, KVS, Modern, and Union violated District law by providing real estate agents exclusive, lucrative, and discounted investment opportunities either in the companies themselves or in shell entities they created to induce the real estate agents to make business referrals that generated increased revenues for the companies. In return for the referrals, the agents received kickbacks in the form of a split of the profits. Modern and Union were created for the explicit purpose of recruiting agents to refer title insurance business to them in return for a share of the profits. Allied and KVS created shell companies for the same purpose.
In addition to profits from referrals, Allied compensated real estate agents for participating in the scheme by organizing and hosting multiple parties on yachts in the Chesapeake Bay. These yacht parties rewarded the agents for referrals, sought to ensure their continued loyalty, and incentivized future referrals.
OAG’s investigation revealed that the financial incentives these companies provided to real estate agents led those agents to aggressively steer their homebuying clients to the companies in ways that reduced buyers’ ability to shop for the best price or service. This behavior inhibited competition in the District’s title insurance and escrow market, and it harmed other title companies that followed the law but lost business to the companies operating the unlawful schemes.
Under the terms of the agreements:
- Allied will pay $1.9 million to the District.
- KVS will pay $1 million to the District.
- Union will pay $325,000 to the District.
- Modern will pay $65,000 to the District.
- The District will devote up to $1.75 million from these settlements to restitution for affected consumers. OAG will share more information with homeowners in the coming months.
- All four companies agreed to end the practice of giving real estate agents consideration for the referral of title insurance business and will either cease their title insurance operations in the District or divest real estate agents from their ownership interests in the shell companies.
OAG appreciates KVS immediately ceasing its practices and cooperating with the investigation. Modern and Union were also cooperative with OAG’s investigation, and all four companies quickly agreed to end these practices before the investigation concluded.
OAG is continuing to investigate the issue of kickbacks across the title insurance industry to protect consumers, provide a level playing field for companies that follow the law, and ensure a competitive marketplace.
Tip of the Week – Join The Loan Officer School for 2024 CE
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- Learn what not to say about HPA-PMI cancellation.
- Discover the truth about non-HPA MI cancellation – You may have it wrong.
- If you provide appraisal copies three days before consummation – That may be too late under Regulation B.
- § 1002.14(a)(2) Timing requirements for disclosing the applicant’s right to receive a copy of all written appraisals – You may have it wrong.
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